Lot of Explaining to Do:
Chinese Defense Expenditures
Richard A. Bitzinger
The findings and arguments expressed in this paper are strictly those of
the author and should not be construed as representing those of any
organization, institution, or agency, public or private.
Seek truth from facts.
– Deng Xiaopeng
Just the facts, ma’am.
– Joe Friday
Defense budgets can be
a useful, even critical, indicator of national defense priorities, policies,
strategies, and capabilities. The
size of a country’s defense budget, the rate of growth or decline in its
military expenditures, and what it spends its defense dollars on can reveal much
about a country’s strategic intentions and future military plans. Defense budgets can also be a good indicator of a country’s
military modernization priorities and therefore its possible future military
capabilities. Finally, military
expenditures can serve as a gauge of a nation’s defense commitment and
resolve, or its potential to threaten others.
Consequently, it is not
surprising that Western China watchers are keen to know more about Chinese
defense spending. As China looms
ever larger in the Western, and particularly U.S., security calculus, concerns
over China as an actual or potential military challenge have grown
correspondingly. One piece of the
“China threat” puzzle is understanding where current Chinese strategic and
military priorities lay, and whether the PRC is investing sufficient resources
in these priorities to constitute a serious security concern for the West.
In this regard, what
insights do we hope to get from analyzing defense budgets and military
expenditures? Ideally, such analysis should inform us better as to:
As an indicator of the country’s determination to modernize its armed forces
over the long haul, what are China’s long-term commitments to defense
spending? Is Beijing willing to
increase defense spending both in real terms and over a sustained period?
How does this compare with neighboring states and potential rivals?
burden on the national economy:
Is China spending an “inordinate” amount of money on defense, compared to
other nations? How sustainable are
current levels of spending?
Which defense technologies, military research and development (R&D), and
arms procurement programs are receiving priority spending?
How many of a particular type of weapon system are being produced and
acquired? What does this say about
current or emerging Chinese military doctrine or strategy?
How much is being spent on personnel vs. operations and support (O&S)
vs. equipment, all of which indicates different priorities for force improvement
and has different timelines for payoffs? Is one area of expenditure starving out of the others?
How much funding is going to which branch or branches of the military?
Is more money being spent on the modernizing the navy and air force, and
hence on increasing power projection capabilities, or on ground forces and
territorial defense, i.e., People’s War?
Is the PLA putting more funding into technologies relating to the
so-called Revolution in Military Affairs (RMA), particularly information warfare
and precision-strike, which could result in increased capabilities to fight an
unconventional or asymmetric war?
Seeking Truth From Facts: What Do We Definitely
Know About Chinese Military Expenditures, What Do We Think We Know, and What Do We Not
Basically, when it comes
to national security and defense, we can see if (and where) a country is putting
its money where its mouth is. As
such, the strength of defense budget analysis is its use of “hard,”
empirical information – i.e., fiscal authorizations, allocations, and outlays
– that can be quantified and charted. This
information, in turn, can be compared, tracked and trend-lined over time, and
subjected to regression analysis, and therefore be used to reveal insights into
a country’s plans, priorities, and likely capabilities.
However, before we can
use defense budgets and military expenditures to address such quantifiable
issues, we must first have the budgetary figures to work with.
More than almost any other field of inquiry, defense budget analysis is a
highly data-dependent field of study – in other words, it involves a lot of
number-crunching. Therefore, it
demands having a lot of numbers to crunch, and the more numbers we have, the
more detailed (and useful) will be our analysis.
This data issue is the
greatest obstacle to constructing useful methodologies for studying and
interpreting Chinese defense spending in-depth.
Ironically, despite its need for large amounts of data, few areas of
Chinese military studies actually have access to less
reliable data than defense budget analysis.
Basically, we possess only three firm facts when it comes to Chinese
We know the official “topline”
figure for Chinese military expenditures.
Every March, as part of its annual state budget, the Chinese release a
single overall figure for national military expenditures.
In 2000, this figure was approximately 121 billion yuan, or $14.6
billion. We possess similar top-line figures for Chinese defense
spending going back to 1950. Consequently,
we can argue, with a relatively high degree of confidence, that official Chinese
military expenditures have increased significantly in real terms over the past
decade. Armed with reasonably
reliable data regarding China’s inflation rate (i.e., the national consumer
price index), we can estimate that, after inflation, China’s official defense
budget has more than doubled between 1989 and 2000, and in particular has risen
58 percent in just the past five years (1995-2000) (Figure 1).
From this, we may infer that Beijing is seriously committed to
modernizing the PLA and overcoming current personnel, equipment, and
O&S-related impediments to fielding an advanced military force.
know the official defense budget as a percentage of government spending and of
GNP. Since we have the overall figure for the annual state budget
and can roughly calculate China’s gross national product, we can determine
that during the past decade, the defense budget comprised approximately nine to
10 percent of central government expenditures and less than two percent of GNP.
Both figures have fallen significantly from their levels during the 1970s
and 1980s, indicating that, even as defense budgets are increasing, military
spending is actually a declining burden on the Chinese economy.
have a rough breakdown of official defense expenditures. According
to Beijing’s 1995, 1998, and 2000 defense “white papers,” the official
defense budget is distributed almost equally between personnel, operations and
support (O&S), and equipment. In
2000, for example, the exact apportionment was 34 percent for personnel (40.6
billion yuan), 35 percent for O&S (41.8 billion yuan), and 32 percent for
equipment (38.9 billion yuan). In
U.S. dollars, this equates to $4.9 billion, $5 billion, and $4.7 billion,
addition, most Western analysts of Chinese defense spending are reasonably
certain that the official budget omits a number of critical expenditures,
including (1) research and development costs;
(2) arms imports; (3) expenses for the
People’s Armed Police and reserve forces;
(4) state support for China’s military-industrial complex;
and (5) earnings from PLA-run businesses.
In addition, we are reasonably certain that some kind of purchasing power
parity (PPP) formula should be applied to Chinese defense expenditures, in order
to provide a more accurate reflection of its true value in terms of relative
spending power. Many goods in the Chinese “defense spending basket” cost
much less than in the West: conscription and lower living standards in the PLA
saves monies on personnel, while low wages at defense factories depresses the
costs of arms procurement. These
disparities should be corrected by some kind of PPP multiplier, especially if
when attempting to compare Chinese defense spending to military expenditures in
after these few facts and reasonable assumptions, reliable data regarding
Chinese defense expenditures get much shakier.
In fact, the unknowns and the unknowables concerning Chinese military
expenditures greatly outnumber our known data.
For example, beyond the highly aggregated spending figures for personnel,
O&S, and equipment, we lack any further details as to how China’s official
defense budget is distributed. We
do not know how much funding is specifically going to the army, air force, or
navy, how much is being spent on which particular R&D and procurement
programs, how many of what kind of weapons (aircraft, ships, tanks, or missiles)
are being procured annually, or how much support is being specifically accorded
to items like training, logistics, or improving soldiers’ living standards.
In addition, we lack such detailed budgetary figures over time, which
would permit trend and trade-off analyses.
Compounding this lack
of detail concerning the declared defense budget, we do not know how much
China’s extrabudgetary military expenditures actually are.
For example, while we are reasonably certain that defense R&D costs
are not reflected in the official budget, we have no idea how much the Chinese
actually spend on R&D.
At the same time, while
we are reasonably sure that some kind of PPP exists for Chinese defense
spending, we have no clear idea what it actually is; PPPs for China can and do
vary widely. As Michael O’Hanlon
has stated, “Unfortunately, purchasing-power parity measures are very
difficult to compute and inherently imprecise.
Among the chief challenges are uncertainty over which goods to place in
the ‘defense spending basket’ and which goods to consider strictly
comparable between one country and another.”
Crafting a New Framework for Additional
In the absence of
additional hard data regarding Chinese military expenditures, Western analysts
have been forced to fall back upon extrapolation, inference, and conjecture in
order to come up with “reasonable” guesses as how large extrabudgetary
spending is, how it should be valued (i.e., how large a PPP should be applied to
the data), how much is likely spent on defense R&D and procurement, etc. Unfortunately, this approach is fraught with many
methodological pitfalls. For
example, in attempting to calculate a “reasonable” procurement budget,
analysts typically factor two “guesstimates” (i.e., how much a particular
item might cost and how many might be purchased); basic probability theory
should warn us that the resulting budget figure would be a highly unreliable
It should come as no
surprise, therefore, that these efforts have resulted in a broad range of
assumptions of likely Chinese defense spending, which – depending on one’s
assumptions regarding inputs, valuations, and PPPs – can vary by as much as
Even if one excludes the most extreme estimates, Western calculations of
“likely” Chinese military expenditures still differ from each other by
nearly 300 percent. This
bigger-than-a-breadbox/smaller-than-an-elephant type of analysis does little to
help us understand the practical implications of actual Chinese defense
Nor do we possess sufficient detail to make assertions, based on what we
know about Chinese military expenditures, as to specific Chinese military
priorities, intentions, plans, or procurement.
In particular, we have no data as to how defense spending is directly
affecting power projection capabilities, training, morale, living conditions,
R&D, and high-tech weaponry, etc. Consequently,
defense budget analysis provides little help when it comes to assessing Chinese
defense modernization efforts and future likely military capabilities.
We may argue that higher or increasing defense spending is
“threatening,” but we cannot identify specifically where and to what extent.
Unfortunately in the
absence of additional budgetary data, there is little we as analysts can do to
advance the field of Chinese defense budget analysis.
We might press the Chinese to be more forthcoming and transparent when it
comes to military expenditures – i.e., to release more detailed defense
budgets, along with additional (and more detailed) defense white papers – but
we should not too optimistic that this will garner significant results in terms
And while there probably exist Chinese-language sources that could
provide additional insights and tidbits into the defense budget, these are also
unlikely to include the kind of detailed, over-time data conducive to more
in-depth budgetary analysis.
We can, however, attempt
to improve our methodologies and make our work more intellectually rigorous and
discount unsophisticated approaches that simply fix military expenditures at a
“reasonable” percentage of GNP. We should also discount analysis based on old, highly
avoid politicizing analysis, i.e., “low-balling” or “kitchen-sinking”
extrabudgetary expenditures in order to produce a desired budgetary figure.
At the same time, we should be careful not to get caught up in groupthink
and purposely skew our data to fit the “comfortable middle” of the bell
discount approaches that do not
include some kind of PPP formula – just because we do not know precisely what
the PPP formula is for Chinese defense budgets does not mean that one does not
exist. We should endeavor to come
up with a mutually agreed-upon PPP for Chinese military expenditures.
not let politicization and worst-case thinking come to dominate budget
assessments. In particular, we need
to specifically address why
extrabudgetary or increasing military expenditures should be considered
threatening and not just take it as a self-evident fact.
Likewise, we should be careful when making statements like “Chinese
defense expenditures could be as a high as…” since one person’s high-end
estimates often become another’s baseline arguments.
attempt to be more interdisciplinary and engage more outside functional experts
– particularly genuine number-crunching budgetary analysts – in our
research. At the very least, these
experts can serve as a sanity check on our methodologies.
attempt more alternative analysis of what we definitely know to be factual about
Chinese military expenditures. One
possible approach would be to assess how far likely spending levels might go in
covering basic defense requirements for such things as basic living standards,
training, logistics, and procurement. For example, the declared
procurement budget alone amounted to $4.7 billion in FY 2000 – not an
insignificant amount, and it would be interesting to see what and how much such
a budget could buy.
We might also explore whether increased official spending is being offset
by cuts in extrabudgetary funding (such as compensation for PLA divestiture or
for arms imports).
Above all, we should
resist the easy temptation to make the “bottom-line” the crux of our
analysis – that is, to give out a single figure of X billion of yuan or
dollars as the likely Chinese defense budget and simply leave it at that.
In this regard, we are only duplicating the same dilemma that we
encounter with the official top-line figure for Chinese defense spending: we
fail to provide any reliable indicators of where
the money is going and why.
In the absence of any further context – e.g., what the Chinese are
specifically spending their defense budget on, is it cost-effective (i.e., are
they “spending smart”?), what are their spending trade-offs, how does this
spending compare to other countries’ military expenditures, etc. – such an
approach offers little useful information or analysis.
Finally, we need to be honest with ourselves: Given the current (and
likely continuing) paucity of sufficient data, we should acknowledge the severe
limitations of our efforts, and we should make especially sure that the consumer
also recognizes the considerable uncertainty and the large probability of error
present in our analyses and assessments. Until
we have more data, defense budget analysis of Chinese military affairs will
function best as an adjunct to or as a check on other types of empirical
research – areas where the arguments are likely to be more impressionistic and
 Recent Western writings on Chinese defense expenditures include David Shambaugh, “Wealth in Search of Power: The Chinese Military Budget and Revenue Base,” paper delivered to the Conference on Chinese Economic Reform and Defense Policy, Hong Kong, July 1994; Bates Gill, “Chinese Defense Procurement Spending,: Determining Intentions and Capabilities,” in James R. Lilley and David Shambaugh, eds., China’s Military Faces the Future (Washington: American Enterprise Institute, 1999); Arthur Ding, “China Defense Finance: Content, Process, and Administration,” China Quarterly, June 1996; Wang Shaoguang, “Estimating China’s Defense Expenditure: Some Evidence from Chinese Sources,” China Quarterly, September 1996; International Institute for Strategic Studies (IISS), “China’s Military Expenditures,” The Military Balance 1995/96 (London: IISS, 1995), pp. 270-275; and Richard A Bitzinger and Chong-Pin Lin, The Defense Budget of the People’s Republic of China (Washington, DC: Defense BudgeProject, 1994).
 Recent but unsubstantiated press reporting adds that China will continue to boost defense spending with double-digit annual increases for at least next six years. This could double the annual defense budget to $30 billion by 2005. Lester J. Gesteland, “China Defense Budget Up 15-19% This Year,” ChinaOnLine News, January 31, 2000 (www.chinaonline.com).
 Wang Shaoguang asserts that the Chinese “openly” acknowledge that R&D spending is accounted for under other areas of the state budget. Wang, “Estimating China’s Defense Expenditure.”
 During most of the 1990s, China imported an average of $775 million worth of arms every year. U.S. Department of State, Bureau of Verification and Compliance, World Military Expenditures and Arms Transfers 1998 (Washington, DC: U.S. Department of State, 2000), p. 129.
 PAP expenditures are believed to be paid for out of central government expenditures on “administrative expenses,” while the costs of PLA reserves are borne out of provincial budgets.
 Official defense budgets likely do not include the costs of direct subsidies to Chinese defense industries or (in more recent years) forced loans by state-owned banks to arms factories (many of which end up having to be written off as nonperforming.
 Until the forced divestiture of most PLA-run commercial enterprises in late 1998, profits or budgetary offsets from these activities (e.g., farms, factories, services, hotels, etc.) could be counted as additional sources of revenues for the military. It is still unclear how many PLA-owned business were actually sold off (most PLA-run farms were exempted, for example), how many are still secretly owned by the Army (e.g., through dummy partnerships), and how many divestiture orders were simply ignored.
 Michael O’Hanlon, “The U.S. Defense Spending Context,” in Leon Sigal, ed., The Changing Dynamics of U.S. Defense Spending (Westport, CT: Praeger Press, 1999), p. 14.
 Wang argues that likely Chinese military expenditures in 1994 were roughly $10 billion, while a RAND report put this figure at nearly $150 billion.
 At the same time, given
what little concrete data we have regarding Chinese military spending,
almost any additional information can illuminating.
For example, with information in the 2000 defense white paper, we now
possess data on the PLA budget for personnel, O&S, and equipment for
four years (1997 to 2000). Even a cursory analysis of this data reveals some interesting
While all three areas of military spending have remained roughly
equal to each other, personnel spending grew only 39 percent between 1997
and 2000, while the equipment budget rose 52 percent over the same period,
and the O&S account increased 58 percent.
Despite assertions that the lion’s share of the recent growth in
Chinese military expenditures has gone toward improving PLA soldiers’
standards of living, the personnel budget has, in fact, secured only 26
percent of all additional military spending since 1997. Thirty-eight percent of these additional monies went to
O&S spending, while the equipment budget received 36 percent.
 David Shambaugh and Bates Gill have identified a few Chinese sources on the defense budgeting process, but these appear to be overviews of the budgeting process and budget management, rather than detailed accountings of military expenditures. See Lu Zhuhao, ed., Zhongguo junshi jingfei guanli (Chinese Military Expenditure Management) (Beijing: Jiefangjun Chubanshe, 1995); Zhongguo junshi caiwu shiyong daquan (Complete Practical Guide to Chinese Military Finance) (Beijing: Jiefangjun chubanshe, 1993); Liu Yichang and Wu Xizhi, Guofang jingjixue jichu (Basics of Defense Economics) (Beijing: Junshi Kexue Chubanshe, 1991).
 I specifically refer here to the ACDA/State Department approach to calculating Chinese military expenditures, which is based on original data and formulas (particularly when it comes to calculating purchasing-power parity) that are at least a decade old. In fact, ACDA by its own admission states that its estimations of Chinese military spending “should be treated as having a wide margin of error.” World Military Expenditures and Arms Transfers 1998, pp. 203-204.
 For example, Bates Gill argues that, at such a level of funding, the Chinese could conceivably afford a moderate-to-high level of procurement (e.g., several dozen fighter aircraft, five to 10 surface combatants, two to five submarines, and several hundred missiles over a five year period). Additionally, a study by the Defense Science Board calculated that a developing country could acquire a reasonably high capacity for high-tech/RMA-type warfare – e.g., information warfare, integrated reconnaissance-strike platforms, precision-guided munitions, ballistic and cruise missiles, submarines, and sea-mines – with an investment of only $20 billion over a 10-year period ($2 billion a year). Finally, if we assume that the double-digit real increases in recent defense budgets will continue, the equipment will increase by a significant amount every year. Gill, “Chinese Defense Procurement Spending,” pp. 220-223; Defense Science Board Summer Study: Investments for 21st Century Military Superiority, Executive Summary Briefing (Washington, DC: Office of the Undersecretary of Defense for Acquisition and Technology, November 1995), pp. 9, 11.